A few comment by Biderman.
The biggest problem the developed world is facing is that the governments and banking institutions that got us into the present mess are not capable of solving the problems they themselves created. Not even with new leadership.
Why? Not enough income growth and too much government spending. That is obvious looking at the combined income statements and balance sheets for the United States, Euroland and Japan. The bottom line is that the combined take home pay, whether taxed or not, of everyone in the United States, Europe and Japan is not sufficient to generate enough taxes to pay all current government expenditures. Let me repeat that, the developed worlds take home pay is not sufficient to generate enough taxes to pay for current government spending.
The Economist shares some views on banking and the (non) role of supply and demand in banking.
THE crisis has taught people a lot about the banking industry and the thought processes of its leaders. These lessons can be distilled into four golden rules.
1. The laws of supply and demand do not apply. When food producers compete to supply a supermarket, the retailer has the luxury of selecting the lowest bidder. But when it comes to investment banking, wages are very high even though the number of applicants is vastly greater than the number of posts. If the same was true of, say, hospital cleaning, wages would be slashed
An investment bank, like a supermarket, demands a certain quality standard: it will not hire just anybody. But whereas it may be easy to identify a rotten banana, it is harder to be sure which trainee will be the next Nick Leeson and which the potential George Soros. That gives executives an excuse when things go wrong. (full reading here).
With the Spanish bank bail out “behind” us, some of the elite rulers are next. From NYT on the Spanish banking crisis moving to court. To be continued….
On Wednesday, a Spanish national court judge ordered Rodrigo Rato, a political ally of Spain’s prime minister and former head of the International Monetary Fund, to appear in court to face criminal fraud accusations over his recent stewardship of the giant mortgage lender Bankia.
Bankia, which the government seized in early May, is at the center of the financial storm that has led Spain to seek a European bailout of its banks. But several other Spanish banks are also embroiled in court cases, brought by politicians, shareholders and prosecutors, as well as the government’s own bank overhaul agency.
Guest post by Azizonomics.
This is nuts. UK banks want to charge customers for the privilege of handing over their money and letting banks gamble it in the global derivatives casino.
From the Telegraph:
A groundswell of support for change is understood to be gathering among the authorities. The Treasury’s advisers on the Independent Commission on Banking and the Office of Fair Trading are said to be also backing the proposals, alongside the treasury select committee and financial regulators.
Britain is the only country in Europe to operate a “free-in-credit” model of current account banking. Instead of levying fees on an account, lenders make their money through “stealth charges” on overdrafts and cross-selling of other products. Only India and Australia run equivalent models.
Regulators and officials want to reform the system to boost competition by making it easier to compare rival accounts. They also believe so-called “free banking” encourages mis-selling of financial products, exposes banks to compensation risks and lets customers down.
So the impression that bankers and regulators have seems to be that banks are doing customers a favour by holding onto their money and occasionally losing it all buying junk securities.
Nope. In a free market, banks that tried to charge customers for the privilege would be laughed out of the marketplace. Banks — by their very definition as intermediaries — generate profits from making good investments, not by charging customers for the privilege of holding their money.
Headline in the FT “Spain to force banks to set aside €30bn.” This is a bad joke. One which ordinary Spanish people are going to pay for in blood.
First, €30bn is a joke because it is not enough and the Spanish central bank and the government know it.
Second, 30bn of what? The Spanish banks don’t have 30bn of anything worth setting aside.
According to a Bank of Spain presentation quoted in an article by Bloomberg, the bad debt provisions of Spanish banks so far
would cover losses of between 53 percent and 80 percent on loans for land, housing under construction and finished developments.
The additional €30B announced today
would increase coverage to 56 percent of such loans,..
Guest post by Azizonomics.
Meet James. James bought a house. It cost him $150,000, of which $30,000 had come from his own savings, leaving him with a $120,000 30-year fixed-rate mortgage from the WTF Bank, with a final cost (after 30 years of interest) of $200,000. Now, up until the ’80s, a mortgage was just a mortgage. Banks would lend the funds and profit from interest as the mortgage is paid back.
Not so today. James’s $200,000 mortgage was packaged up with 1,000 other mortgages into a £180 million MBS, (mortgage backed security), and sold for an immediate gain by WTF Bank to Privet Asset Management, a hedge fund. Privet then placed this MBS with Sacks of Gold, an investment bank, in return for a $18 billion short-term collateralised (“hypothecated”) loan. Two days later Sacks of Gold faced a margin call, and so re-hypothecated this collateral for another short-term collateralised $18 billion loan with J.P. Morecocaine, another investment bank. Three weeks later, a huge stock market crash resulted in a liquidity panic, resulting in more margin calls, more forced selling, which left Privet Asset Management — who had already lost a lot of money betting stocks would go up — completely insolvent.
You should be. This is of course a fictitious story. But the really freaky thing is that this kind of scenario — the packaging up of fairly ordinary debt into exotic financial products, which are then traded by hundreds or even thousands of different parties, has occurred millions and millions of times. And it is extremely dangerous. When everybody is in debt to everybody else through a complex web of debt one small shock could break the entire system. The $18 billion debt that Privet owed to Sacks of Gold could be the difference between Sacks of Gold having enough money to survive, or not survive. And if they didn’t survive, then all the money that they owed to other parties, like J.P. Morecocaine, would go unpaid, thus threatening those parties with insolvency, and so on. This is called systemic risk, and shadow banking has done for systemic risk what did the Beatles did for rock & roll: blow it up, and spread it everywhere.
The global crisis has shown how a shock that originates in one country or asset class can quickly propagate to other markets and across borders. As in the closed-economy case, the nature of the balance sheet linkages between financial institutions and markets will affect the size of spillovers and their direction of propagation. At the global level, however, financial linkages and channels of propagation are more complex. Many of the data needed for identifying and tracking international linkages, even at a rudimentary level, are not (yet) available, and the institutional infrastructure for global systemic risk management is inadequate or simply non-existent. This paper highlights some of the unique challenges to global systemic risk measurement with an eye toward identifying those high-priority areas where enhancements to data are most needed.
Hudson giving an overview of current affairs with a fired up Lauren Lyster fresh back from Davos.